Friday, October 07, 2011

Investors Vs. Spenders

As I read and write about personal finance, I try to establish or cultivate an investor habit rather than the spender habit with people. Where do you fall?

First, you should understand the difference between an assets vs. flossets!. An asset creates value, while flossets makes you look like you have money! You know them – they include the latest car/TV set/clothes/expensive phones etc. Like a job interviewee with impeccable dressing and good English (well don’t hire those!), a flosser looks like he/she has money and are attractive to many!

Now, in understanding the difference between an investor and a Spender..

1. Interest: An investor earns interest. A spender pays interest. The Central Bank issues Treasury Bonds and Treasury Bills every so often. You can check their website on the Central Bank of Kenya. While investing in these are for big players with millions to spare and an eye for after tax interest , they are now available for investors with as little as Kshs. 50,000 (~$500)

However, fund managers such as Zimele, and a number of collective investment schemes licensed by the CMA pool funds from many small players and credit interest on accounts every quarter. The spender on the other hand funds his many expenses with loans, and is always paying out interest.

2. Capital Gains vs. Losses: The main aim of an investor is to make money not lose it – and he/she earns capital gains on investments like stocks, land, businesses and other investments. However, a spender quickly loses his capital every day on his flossets e.g. a car’s value, which goes down the minute it leaves the showroom.

3. Type of Phone calls: The investor receives phone calls from people who want to create more value or deals that he may make money in; while the spender receives phone calls from shops or friends that want to sell him/her the latest clothes, phones and other gadgets. While these items are not important, changing your phone every time there is a new model, is not financially healthy unless you your balance sheet allows it.

4. A Savings Culture: The investor saves money to build an emergency fund or capital for business. He knows that little by little, with a discipline, he can build a fund that is large enough to sustain him in case of income loss. In contrast, the spender hardly saves. He always has too little money to save even if he has a good income, as he is always servicing high interest loans or paying for more Flossets that his salesmen friends arranged for him.

5. Insurance policies: A smart investor maintains important insurance policies to avoid losing assets in a fire or to thieves. They have taken the time to understand, the somewhat difficult insurance jargon and marketing practices to subscribe to policies that provide some protection to their businesses and families in the event of some losses. A reckless spender may engage in unwise decision like driving a new car for a night out before arranging insurance.